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Antitrust and the Movement of Technology

Patents create strong incentives for collaborative development. For many technologies fixed costs are extremely high in relation to variable costs. A second feature of technology that encourages collaborative development is the need for interoperability or common standards. Third, in contrast to traditional commons, intellectual property commons are almost always nonrivalrous on the supply side. If ten producers all own the rights to make a product covered by a patent, each one can make as many units as it pleases without limiting the number that others can make. That might seem to be a good thing, but considered ex ante it may not give producers the correct incentive to develop the patented technology in the first place. In any event, product differentiation in the output market will typically be sufficient to eliminate the problem of returns that are driven to short run marginal cost.

In its Bement and General Electric decisions the Supreme Court permitted the members of a patent pool to set the product price, reasoning that the protections given by the patent laws are intended to meter the correct amount of innovation, and an explicit cartel selects the same output and price as a single firm. This reasoning confuses patent value with the value of collusion in the product market. Permitting the firms to collude on product price incorrectly predicates the value of the entire cartel markup to the patents.

Often patents are pooled because the problem of identifying and defending boundaries is so significant that the patents are worthless or may even have negative value. The Supreme Court alluded to this problem without specifically addressing it in its March, 2012, Mayo Clinic v. Prometheus decision. A firm will pool when the cost of identifying and defending individual boundaries exceeds the cost of forming an IP commons. Nevertheless, the social cost of using pooling to reverse the effects of worthless patents is substantial. First are the significant costs of operating an economically useless system for acquiring the patent rights in the first place. Then are the significant costs of creating and operating a pool that is designed to reverse the consequences of worthless patent grants.

Under United States antitrust law no firm has a general duty to deal with rivals. One difference between refusals to share ordinary productive assets and refusals to share IP rights is that ordinary productive assets can typically be replicated by others. But a patent gives a right to the technology that it covers and makes it unlawful for rivals to duplicate that technology, even if they do so on their own.